jigsaw

B2B contract renegotiation in challenging times

Posted by Elizabeth Allcock on September 14, 2020 08:39:00

The COVID-19 pandemic has left many organizations renegotiating contracts sooner than they envisioned due to the uncertainty in the marketplace and the changing conditions of business which, when combined, result in their trading partners being unable to meet the current deal terms.

Contract negotiation is a difficult exercise at the best of times, because a great amount of time and effort is spent up-front in negotiating B2B contracts, but due to the pandemic expediting contact renegotiations, these challenges have been magnified. For example, contract renegotiation will open up the possibility of having to agree to less favourable terms than before. We have also found that companies tend to file their B2B contracts away and very little attention is spent in understanding and tracking their on-going performance. Businesses that fall short of monitoring their B2B contracts fail to maximise revenues, control costs and open their organisations up to a multitude of risks for their deals. They are also in a weaker position during renegotiations as the true benefit of their current deal is unknown.

By looking at the wider picture when approaching contract renegotiations this will not only serve your interests better, but also improve collaboration with your suppliers. If you neglect the glaring issues, contract renegotiations in the wake of COVID-19 will mean missing out on new revenue opportunities for your B2B deals which could actually be the foundation to increase profits in the long-term!

When to begin contract renegotiations

Now we all agree that B2B contracts are typically renewed annually or when they approach the end of their agreed timespan. However, there is a crucial difference between simply renewing an agreement and renegotiating for different terms! Typically, renegotiations are infrequent but tend to be triggered by the growth or decline of one of the trading partners – are there new locations to be considered? Have entire new product ranges been launched? Did you grossly overperform under the last contract?

It is common to avoid renegotiating new terms for active deals - particularly if things didn’t go so well the last time you tried! A return to a contract negotiation typically indicates that there was an error in the original B2B contract or that the final contract didn’t meet the organization’s needs. However, sometimes a bigger problem (like a pandemic!) means that the terms of the original B2B contract can’t be met as planned and neither party gets the intended benefit. In this case, there is no choice but to go back to the table and renegotiate our B2B contracts.

Usually there may not be any urgent reason to begin contract negotiations for your deals, and you might tend to leave things as they are for the time being. Although this may not be the best idea, because things can evolve in the supply chain very quickly, meaning you could miss out on a rebate opportunity if you weren’t paying attention to what a new B2B contract might offer you. Having the ability to easily negotiate changes or smaller Ad Hoc deals could dramatically increase your earning potential.

Although the pandemic is a rarity, we should treat contract renegotiation as an ongoing part of a collaborative relationship with all suppliers. When we do this, our relationships become better and we put ourselves in a much stronger position for future contract renegotiations.

Tips for making contract renegotiation easier

Although renegotiating contracts during these difficult times may be an uncomfortable task, businesses who find themselves unable to fulfil their B2B contract obligations as a result of COVID-19 should first contact the other trading partner to renegotiate a compromise if possible. You’ll probably find that they too will have been negatively impacted by COVID-19.

It is imperative that both sides are willing to be flexible in renegotiating a new deal that serves the interests of all trading partners. To best protect your business during these challenging times, understand the current situation of your vendors and suppliers, and review B2B contracts to identify areas where you can save money and mitigate risk.

For better contract renegotiations, the following tips are worth keeping in mind:

  • Put yourself in their shoes – Businesses tend to get so absorbed in their own problems that they forget that their trading partner may have similar problems too. Try to listen to them, ask questions and understand their challenges and the pressures they’re under. The more you find out about them and their priorities, the better you can start thinking about what’s important to you and what’s important to them. Think about how you might be able to alleviate some of their pain points in ways not specified in your contract. Maybe you can make useful introductions to others in your supply chain, for example.
  • Collaborate and work together - COVID-19 has made it even more important to preserve mutually valuable and collaborative relationships. It is often helpful to think of the contract renegotiation process as a problem-solving endeavour with the partners that help your business to thrive, rather than simply focusing on who “wins” and “loses” under the terms of the new deal. Understand that part of the stability of your business relies on having stable trading partners. Empathize and show this understanding by offering to renegotiate even the most minor contracts rather than rushing to terminate them.
  • Forecast potential scenarios – it is critical in challenging times to contemplate your trading partners intentions; you do not want to spend time and money on contract renegotiation and then be left with a similar contract to before. With COVID-19 rules and the economy changing all the time, it’s helpful to think of all possible scenarios that could affect your contract negotiations.
  • Stay focused on the benefits and value - If you go into a contract renegotiation staring at lost revenue you are likely to become even more competitive and uncooperative. Both sides of the trading partnership should benefit from a renegotiated contract, if they don’t then the relationship could be negatively impacted both in the short term and in the long term when normality resumes.
  • Conduct due diligence - As with any contract renegotiation, it is difficult to assess your negotiating leverage without conducting some research. For instance, how is your trading partner being impacted by COVID-19; what risks do they face; how are other businesses in the industry addressing the challenges; and when is the industry expected to recover? Don’t go into negotiations blind.
  • Understand your B2B contract inside out – It is important that both trading partners familiarize themselves with the current trading agreement, understanding what their rights and obligations are. It is equally important to be realistic and identify the provisions that may be difficult to satisfy in light of COVID-19, the conditions the parties can terminate the contract and what penalties may be imposed for doing so.
  • Knowing what your business needs – When entering contract renegotiation due to changed circumstances, it is important to have a clear picture of what your business needs (i.e. your goals) and what your business can live with (i.e. your fall-back position). You should be sensitive to your Trading Partners non-negotiables also and understand what is valuable to their business. Work this out before contacting the other party and your negotiations will run smoothly.
  • Analyze all external factors – Given the risk of future business closures, quarantines, travel restrictions, and supply-chain disruptions due to COVID-19 it’s good to do your research and understand the external factors causing the renegotiations. This will assist in decisions regarding what can be expected and what is unreasonable. Gather evidence to support your position, so that you are able to readily defend it and explain why the renegotiation is necessary for both parties.
  • Change up your contract renegotiation team - It’s often considered logical to put the same contract renegotiation team together as was involved in the initial contract. While they certainly have the knowledge of the original agreement and the relationships formed, there can also be disadvantages, such as they have too much invested in the original deal and can’t admit its failures. Sometimes a different perspective and a new contract renegotiation team can make all the difference.
  • Document all communications - While COVID-19 has forced renegotiations to take place online, it’s important that you have a paper trail of what had been discussed and agreed by both trading partners. Written records can be used to correct miscommunication and will be helpful if a dispute arises at a later stage. It also ensures that if members of the renegotiation team change, the negotiations can continue easily. Variations in B2B contracts should also be properly recorded in a legal document to avoid future contract disputes.
How can Enable support your contract renegotiations going forward?

If these unprecedented times have told us anything, it is that we’re all in this together! Let’s try to stop thinking of contract negotiations as adversarial competitions, trying to outdo our trading partner, and instead think of them as a collaborative way to achieve reliable growth, nurturing trading relationships for the future.

With Enable’s collaboration platform you can get clear visibility of the proposed terms, view and interact with your B2B contracts – supplying additional information and data - and communicate with your trading partners on one central platform making managing B2B renegotiations much easier and much more reliable. Our aim is to provide a contract renegotiation hub for you to nurture your trading relationships and facilitating seamless renegotiation if your proposed deals aren’t quite right!

Having a more flexible approach to B2B contract renegotiations, with more of a focus on shared benefits (laying the foundations for future long-term strategic partnerships) rather than individual losses, can offer that all important first step towards business recovery and better cash flow whilst simultaneously helping to improve the security and stability your business can expect if similar economic turmoil faces the world again. Collaboration is in everyone’s best interests.

New Call-to-action

Topics: Contract Management, Supplier Collaboration